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Measuring  and   Forecasting  Genersl 


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UNIVERSITY  OF  CALIFORN 
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Measuring,  and  Forecasting 

General 

Business  Conditions 


By 
WARREN  M.  PERSONS,  Ph.D. 

Professor  of  Economics,  Harvard  University.     Editor  of  The  Reoieu) 

of  Economic  StalisUcs  and  Statistical  Seroice.  published  by  the  Harvard 

University  Committee  on  Economic  Research. 


AMERICAN  INSTITUTE  OF  FINANCE 


INDICES  OF  SPECULATION.  BUSINESl  AND  BANKING:    1903-14  AND  1918-20 


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Measuring,  and  rorecasting, 

Oeneral 

Business  Conditions 


By 

WARREN  M.  PERSONS,  Ph.D. 

Professor  of  Economics,  Harvard  University.     Editor  of  The  Review 

of  Economic  Slatislics  and  Slatisdcal  Seroice   published  by  the  Harvard 

University  Committee  on  Economic  Research. 


AMERICAN  INSTITUTE  OF  FINANCE 
BOSTON 


OUR 
^'COMPLETE  EDUCATIONAL  COURSE" 

IN  THE  SCIENCE  OF 

MAKING  MONEY  MAKE  MORE  MONEY 


This  list  is  arranged  in  the  order  of  proper  reading.  The 
loooks  are  accompanied  by  a  series  of  test  questions,  key  prob- 
lems and  analyses  outlines,  enabling  the  student  to  apply  the 
knowledge  acquired  to  immediate  stock  market  and  investment 
■conditions. 

1.  Developing  Financial  Skill     11.  Investment  Securities 

2.  Forces  Which  Make  Prices     12.  Business  Cycles 

3.  Manipnlation  and  Market     ^^-  ^^^^^^^ring    and    Forecasting 

General    Business     Condi- 


Leadership 

4.  Handling  a  Brokerage  Ac- 

count 

5.  Market  Information 

6.  The  Essential  Features  of 

Securities 

7.  The   Value  of  a   Railroad 

Security 

8.  Indusirial  Securities 

9.  Oil  Securities 

10.  Mining  Securities 


tions 

14.  The  Technical  Position  of  the 

Market 

15.  Money  and  Credit 

16.  Business  Profits 

17.  Launching  a  New  Enterprise 

18.  Securing   Capital  for  Estab- 

lished Enterprise 

19.  Internal  Financial    Manage- 

ment 

20.  Search  for  Bargains 


Copyright,  1919-20,  by 
Harvard  University 

Copyright,  1922,  by 
American  Institute  of  Finance 


^ 
^ 

^ 


TABLE  OF  CONTENTS 

^  Pafee 

'        Chapter  I.     The  Problem:  When  to  Buy  or  Sell 

\                Prices  and  Price  Movements 5 

The  Problem  Stated 5 

N 

Chapter  II.     The  Method:  Construction  of  an  Index  for  Measur- 
ing and  Forecasting  General  Business  Conditions 

Two  Methods  of  Procedure 7 

Discrimination  Required 7 

Analysis  Which  Has  Been  Made 8 

Statistical  Items  Composed  of  Four  Elements 8 

Secular  Trend 9 

Seasonal  Variation 9 

Cycles 10 

Residual  Element 10 

Essential  Refinements 10 

Supplementary  Economic  Analysis 11 

Summary 12 

Chapter  III.     Explanation  of  Corrected  Statistics 

Eliminating  the  Secular  Trend 13 

Eliminating  Seasonal  Variations 14 

Analysis  of  Sequence  of  Fluctuation 15 

Graphic  Illustration  of  Method           16 

Monthly  Tonnage  of  Pig  Iron  Produced  in  the  United  States             .  17 
X;^           Monthly    Rate   of    Interest   on   Si\ty-to-Ninety    Day    Commercial 

^                  Paper  in  New  York 18 

V      Comparison  of  the  Seasonal  Variations  of 19 
The  average  yield  of  ten  railroad  bonds 
The  rate  on  four  to  six  months  commercial  paper 
^SX                  The  rate  on  sixty  to  ninety  days  commercial  paper 
♦•^\                 The  rate  on  call  loans  on  the  New  York  Stock  Exchange 
^^          Actual  Figures  for  Monthly  Tonnage  of  Pig  Iron  Produced  in  the 

United  States,  1903-U 20 

Actual  Figures  for  Monthly  Rate  of  Interest  on  Sixty-to-Ninety- 

Day  Commercial  Paper  in  New  York,  1903-14 21 


447475 


Contents 

Chapter  IV.     The  Sequence  of  Fluctuations  Pa^e 

Three  Distinct  Groups 23 

Composition  of  the  Index 24 

Index  Charts 25 

Chapter  V.     The  Index,  1903-14 

Time  Relationship  Between  Series 30 

Forecasting  of  Movements 32 

Period  of  Transition  1914-18 2,2> 

Chapter  VI.     The  Rationale  of  the  Fluctuations 

Phases  of  the  Business  Cycle 34 

The  Sequence  of  Fluctuations  Described 34 

Pivotal  Factors 36 

Chapter  VII.     The  Index,  1918  to  January  1,  1923 

Recent  Special  Difficulties 38 

Make-up  of  Current  Index  Chart 39 

Interpretation  of  Current  Index  Chart 40 

Forecast  in  February,  1920 40 

Deductions  from  Chart  in  1921  and  again  in  Early  1923         ...  41 

Test  Questions 


CHAPTER  I 
THE  PROBLEM:  WHEN  TO  BUY  OR  SELL 

Prices  and  Price  Movements 

In  modern  industrial  life  the  various  forms  of  activity  — 
farming,  mining,  manufacturing,  jobbing,  transporting,  retailing, 
banking  —  are  inter-related  and  inter-dependent.  Each  indus- 
trial unit  depends  upon  other  units  for  raw  materials  and 
services  as  well  as  for  a  market.  Each  unit,  therefore,  is  both 
purchaser  and  seller  of  goods  for  present  or  future  delivery. 
The  connection  between  the  various  units  is  maintained  through 
contracts  having  price,  whether  of  commodities  of  labor  or  of 
securities,  whether  prices,  wages,  or  interest,  as  the  main  charac- 
teristic. Price  movements  considered  in  the  broadest  sense 
are  the  outstanding  features  of  business  cycles  of  prosperity 
and  depression. 

Every  individual,  corporation,  or  firm  in  business  is,  neces- 
sarily, interested  in  prices.  Profits  are  secured  in  normal  times 
through  careful  buying  and  intelligent  selling.  The  problems 
of  the  manufacturer,  the  dealer,  the  speculator,  or  the  investor 
are,  first,  the  selection  of  the  kind  of  security  or  commodity  to 
buy  or  sell,  and  second,  the  selection  of  the  time  for  purchase 
or  sale.  In  the  present  discussion  we  are  interested  in  the 
second  problem  —  the  selection  of  the  time  for  purchase  or  sale 
and  the  increase  or  decrease  of  commitments. 

The  Problem  Stated 

The  nature  of  a  business  enterprise  determines  in  general  the 
nature  of  the  commodities  or  securities  in  which  the  given  concern 
must  deal.  The  question,  when  to  buy  or  sell,  therefore,  is  realh' 
much  more  important  to  a  given  concern  than  the  question 
what  to  buy  or  sell.  The  problem  when  to  buy  or  sell  is  one  the 
solution  of  which  depends  upon  the  lluctuations  of  the  business 


6  For ecasting  Business   Conditions 

cycle.  Everyone  knows  that  there  are  periods  of  prosperity  and 
periods  of  depression,  that  there  are  ups  and  downs  of  business. 
The  knowledge  of  this  fact,  however,  is  not  a  solution  of  the 
problem  before  us;  that  solution  will  not  be  obtained  until  we 
put  our  answer  in  quantitative  terms.  The  definite  problem 
before  us,  therefore,  is  to  secure  answers  to  the  questions  how 
much  and  how  long  in  regard  to  various  forms  of  business  activity, 
present  and  prospective. 


CHAPTER  TI 

THE  METHOD:  CONSTRUCTION  OF  AN   INDEX  FOR 

MEASURING  AND   FORECASTING   GENERAL 

BUSINESS  CONDITIONS 

Two  Methods  of  Procedure 

In  attempting  to  measure  and  forecast  at  the  present  time, 
speculation,  business  activity,  commodity  prices,  and  interest 
rates,  there  are  two  obvious  methods  of  procedure.  First,  we 
may  draw  parallels  between  the  present  post-war  period  and 
similar  periods  such  as  those  following  the  Civil  War  and  the 
Napoleonic  Era.  Careful  examination  of  these  peiiods,  however, 
will  lead  one  to  the  conclusion  that  the  dissimilarities  are  more 
marked  than  the  similarities  to  the  present.  There  are  valuable 
lessons  to  be  learned,  to  be  sure,  from  a  study  of  these  periods 
but  great  caution  must  be  exercised  in  using  these  periods  as 
precedents.*  One  of  the  great,  perhaps  insuperable,  difficulties 
we  encounter  is  the  scanty  data  obtainable  for  the  earlier  periods. 
Quantitative  results  are  difficult  or  impossible  to  obtain. 

A  second  method  is  to  make  an  intensive  analysis  of  the 
immediate  past  and  interpret  the  present  in  the  light  of  the 
results  thus  secured.  This  method  has  certain  evident  advan- 
tages: There  is  a  much  larger  volume  of  statistical  data  a\ailable: 
the  economic  organization  is  similar  to  that  at  the  present;  it 
is  easier  to  see  what  changes  have  taken  place  and  to  allow  for 
them. 

Discrimination  Required 

The  lessons  even  of  the  immediate  past,  however,  are  not 
obvious;  they  must  be  deciphered.  Careful  scientific  study  of 
the  data,  of  relations  and  correlations,  is  required.     The  data 

*See  the  Review  of  Economic  Statistics,  October,  1919,  and  following  numbers,  for  dis- 
cussions of  these  periods. 


8        Forecasting  Business   Conditions 

necessary  to  measure  business  and  speculative  activity  consist 
of  statistical  series  of  various  kinds,  such  as  commodity  price 
indices,  pig-iron  production,  bank  clearings,  and  interest  rates. 
It  is  as  important  to  find  out  the  difTerences  in  the  regularity, 
sequence,  and  violence  of  the  fluctuations  of  these  series  as  it  is 
to  ascertain  the  similarities. 

The  usual  method  of  securing  a  numerical  measure  of  busi- 
ness activity  is  to  average  a  miscellaneous  group  of  statistical 
series  and  thus  secure  a  composite.  This  procedure  disregards 
significant  differences  and,  as  will  be  shown  in  the  sequel,  results 
in  blurring  the  picture  rather  than  making  it  more  distinct.* 

Analysis  Which  Has  Been  Made 

In  attempting  to  answer  the  question,  is  the  present  the  time 
to  buy  or  sell?  the  pre-war  period  1903-14  was  analyzed.  In 
order  to  get  quantitative  results  the  analysis  was  based  upon 
statistical  series.  In  order  to  get  clean-cut  conclusions  atten- 
tion was  paid  to  the  dissimilarities  as  well  as  to  the  similarities 
among  the  series.  The  entire  analysis  had  as  its  object  the 
securing  of  an  index  of  general  business  conditions-  The  index 
secured  is  fully  described  and  its  current  meaning  is  set  forth 
here  and  in  publications  of  the  Harvard  University  Committee 
on  Economic  Research. 

Statistical  Items  Composed  of  Four  Elements 

Our  index  of  general  business  conditions  is  derived  from 
those  series  of  monthly  items  of  the  industrial,  commercial,  and 
financial  statistics  which  ordinarily  serve  as  the  basis  for  judg- 
ments concerning  the  fundamental  speculative,  business,  and 
banking  situation.  Measurement  of  business  activity,  however, 
is  relative  to  some  standard.  Isolated  items  of  statistical 
series,  upon  which  such  a  measure  must  be  based,  can  have  no 

*The  practice  of  averaging  a  number  of  statistical  series  is  bad  statistical  practice  unless 
there  is  a  peculiar  reason  for  averaging  them.  One  secures  nothing  but  confusion  by  averag- 
ing unhke  items.  Moreover,  it  may  be  stated  at  the  outset  that  the  adoption  of  an  empirical 
rule  of  interpretation  such  as  "action  and  reaction  are  equal"  is  apt  to  lead  one  astray. 


Construction   of  an   I nde x  9 

significance   by   themselves.     Only   by   a   comparison    of   items 
over  a  period  of  time  can  we  ascertain  their  meaning. 

Items  pertaining  to  widely  separated  times  cannot,  moreover, 
be  used  in  their  crude  form.  Each  monthly  item  of  bank 
clearings,  pig-iron  production,  interest  rates,  and  the  like,  is  a 
composite,  the  make-up  of  which  depends  on  the  year  and  season. 
That  is,  various  elements  contribute  to  make  bank  clearings 
for  January,  1920,  for  instance,  the  precise  total  reported.  In 
general  the  actual  items  result  from  the  combination  of  four  /^ 
elements  —  secular  trend,  seasonal  variation,  cyclical  fluctua- 
tion, and  a  residual  factor. 

Secular  Trend 

The  secular  trend  is  the  regular  increase  or  decrease,  accord- 
ing to  some  principle,  over  the  whole  period  under  consideration. 
For  most  series  it  is  a  growth  element,  dependent  upon  popula- 
tion and  the  development  of  industry.  There  is  a  normal 
change  year  after  year  in  a  developing  or  altering  industrial 
society,  just  as  there  is  a  normal  change  in  the  physical  or  mental 
status  of  a  growing  child.  As  used  in  this  exposition,  the 
expression  "secular  trend"  may  refer  either  to  a  statistical  series 
or  to  one  item  of  a  series.  When  it  refers  to  a  series  it  means  the 
straight  line  fitted  to  the  data;  the  measure  of  growth  is  given 
by  the  slope  of  the  straight  line.  When  the  expression  refers 
to  one  item  of  a  series  it  designates  the  vertical  distance  (or  its 
numerical  value)  from  the  curve  or  line  of  trend  to  the  zero  or 
base  line. 

Seasonal  Variation 

The  seasonal  variation  is  the  movement  of  the  items  within 
the  year,  which  we  attribute  to  the  round  of  the  seasons.  There 
is  a  seasonal  change  in  various  lines  of  business  activity  just  as 
there  is  a  seasonal  change  in  temperature  or  rainfall.  Although 
an  iron-clad  system  is  not  to  be  expected,  the  movement  of  the 
items,  to  be  seasonal,  must  be  systematic  year  after  year.  The 
seasonal  variation  of  an  item  for  any  month  is  given  by  an  index 


10      Forecasting  Business   Conditions 

which  expresses  the  "normal"  for  that  month  as  a  percentage 
of  the  preceding  month  or  of  the  monthly  average  for  the  year. 

Cycles 

The  cycles  are  the  undulating  curves  (or  the  numerical 
values)  secured  by  removing  from  the  actual  items  the  secular 
trend  and  the  seasonal  variation,  and  expressing  the  results  in 
terms  of  comparable  units.*  The  actual  figures  thus  corrected 
and  expressed  measure  the  rhythmic  movement  of  business,  the 
ebb  and  flow  corresponding  to  depression  and  prosperity. 

Residual  Element 

The  residual  element  includes  all  sporadic  developments 
which  affect  individual  series,  or  to  widespread  changes  due  to 
momentous  occurrences,  such  as  wars  or  national  catastrophies, 
which  affect  a  number  of  series  simultaneously.  Thus  pig-iron 
production  may  take  a  sudden  slump  if  a  strike  occurs,  railway 
gross  earnings  may  drop  because  of  unusual  storms  or  floods, 
trading  on  the  stock  exchange  may  be  greatly  affected  by  a 
court  decision. 

This  irregular  or  residual  element  has  not  been  eliminated 
by  our  process  of  correcting  the  data,  and  hence  it  is  present, 
along  with  the  cyclical  fluctuation,  in  the  statistics  used  in 
constructing  our  index. 

Essential  Refinements 

In  order,  then,  to  adapt  the  statistical  data  to  our  purpose, 
the  securing  of  a  numerical  measure  of  the  ebb  and  flow  of  busi- 
ness, two  problems  were  solved : 

First,  we  devised  a  method  of  correcting  the  statistics  for 
secular  trend  and  seasonal  fluctuations;  that  is,  we  unravelled 
the  tangle  of  elements  which  constitute  the  fluctuations  in  funda- 

*The  units  used  are  the  standard  deviations  of  tlie  respective  series.  The  standard 
deviation  is  an  average  which  is  so  constructed  that  it  varies  directly  with  the  dispersion  of 
the  items.  See  page  IS  following.  The  cycles  are  the  "percentage  deviations  of  actual  items 
from  secular  trend  corrected  for  seasonal  variation"  divided  by  the  "standard  deviation." 


Construction    of  an    Index  11 

mental  series.  In  other  words,  we  devised  a  method  whereby 
the  actual  series  of  business  statistics  now  published  in  our 
trade  and  financial  journals  were  set  forth  in  such  a  form  as  to 
be  significant  and  reliable  indices  of  business  conditions. 

Second,  having  corrected  the  various  series  of  fundamental 
statistics  for  secular  trend  and  seasonal  variation,  it  was  neces- 
sary to  solve  another  statistical  problem.  The  corrected  series 
have  wave  movements;  for  all  corrected  series  the  elapsed  periods 
from  crest  to  crest  or  trough  to  trough  are  approximately  the 
same.  The  times,  however,  at  which  crests  or  troughs  of  the 
waves  of  the  several  series  occur  are  frequently  not  the  same. 
Nevertheless,  there  are  groups  of  series  in  which  the  wave  move- 
ments are  simultaneous.  In  order  to  get  the  information  which 
the  statistical  series  have  to  give,  it  was  necessary  to  sort  them 
according  to  the  times  at  which  points  of  maxima  or  points  of 
minima  are  reached;  that  is,  it  was  necessary  to  sort  the  series 
in  order  of  the  sequence  of  their  fluctuations. 

The  solution  of  the  problems  just  stated  gave  us  an  index 
which  measures  the  general  business  conditions  of  the  past. 

Supplementary  Economic  Analysis 

In  order  to  use  the  conclusions  thus  obtained,  however,  as 
a  basis  for  forecasting  the  future,  there  is  another  requirement. 
The  past  is  not  exactly  like  the  present  and  future;  it  is  only 
more  or  less  similar.  A  statistical  measure  based  upon  the 
past  may  be  used  in  the  present  and  future  only  insofar  as  the 
underlying  economic  conditions  of  the  past  are  similar  to  those 
of  the  present  and  future.  An  index  of  general  business  condi- 
tions can  be  safely  used  in  forecasting  general  business  condi- 
tions only  when  the  present  is  shown  to  be  similar  to  the  past 
in  all  essential  elements  or  when  allowance  is  made  for  such 
differences  as  occur.  Therefore,  for  forecasting  on  the  basis 
of  any  indices  of  general  business  conditions  obtained  from  the 
data  of  the  past,  a  supplementary  economic  analysis  is  necessary. 

At  the  present  time,  for  instance,  any  forecast,  to  inspire 
confidence  or  even   to  command   respect,   must  allow   for   the 


12      Forecasting  Business   Conditions 

changes  in  our  banking  system  since  1915,  the  recent  change 
of  the  United  States  from  being  a  debtor  to  being  a  creditor 
nation,  and  the  destruction  and  shortage  of  materials  caused 
by  the  war. 

Summary 

Our  method  of  forecasting,  therefore,  is  based  upon  statistical 
analysis  supplemented  by  econo7mc  analysis. 

The  statistical  analysis  requires,  first,  the  correction  of  the 
actual  statistics  so  that  the  corrected  figures  will  show  the  ebb 
and  flow  of  business  prosperity  and  depression,  and  second,  the 
determination  of  the  order  of  occurrence  of  the  cyclical  move- 
ments of  the  corrected  series. 

The  economic  analysis  requires  a  careful  examination  of  the 
underlying  economic  structure  of  the  present  and  past.  Any 
forecast  made  on  the  basis  of  the  index  of  general  business  condi- 
tions, which  is  the  result  of  the  statistical  analysis,  must  allow 
for  the  differences  in  underlying  conditions  as  revealed  by  the 
economic  analysis. 


CHAPTER  III 
EXPLANATION   OF   CORRECTED   STATISTICS 

Eliminating  the  Secular  Trend 

The  object  of  correcting  the  actual  data  is  to  secure  com- 
parable items  over  a  period  of  time,  that  show  the  fluctuations 
of  the  business  cycle.  The  need  of  eliminating  secular  trend 
and  seasonal  variation  from  statistical  series  before  attempting 
to  employ  them  as  indices  of  business  conditions,  as  well  as  the 
method  which  we  have  used  in  such  elimination,  may  be  made 
clear  by  a  simple  illustration. 

Our  purpose  is  to  judge  the  significance  of  items  for  diflferent 
dates.  Let  us  take  the  production  of  pig  iron  in  the  United 
States  at  any  three  dates  some  distance  apart  from  each  other. 
The  tonnage  of  pig  iron  produced  in  the  United  States  in  March, 
1904,  was  1,447,000,  the  tonnage  in  February,  1908,  was  1,077,000, 
while  the  tonnage  in  December,  1918,  was  3,434,000.  Which 
one  of  these  figures  indicates  the  greatest  relative  activity  of 
the  iron  industry,  relative,  that  is,  with  respect  to  the  facilities 
of  the  industry  at  the  time  in  question? 

To  answer  this  question  we  must  take  account  of  the  fact 
that  the  country  and  the  iron  industry  have  grown  in  the  interval 
from  March,  1904,  to  December,  1918.  It  is  obvious  that  if  the 
growth  were  by  equal  monthly  increments,  a  "normal"  of 
1,528,000  tons  in  March,  1904,  for  instance,  would  not  be  normal 
in  1908  or  1918.  On  the  assumption  of  uniform  growth  the 
normal  of  February,  1908,  would  be  1,901,000  tons,  and  that  of 
December,  1918,  would  be  2,932,000  tons.  The  actual  pro- 
duction figures  for  the  three  months  are  1,447,000  tons,  1,077,- 
000  tons,  and  3,434,000  tons,  respectively.  The  ratios  of  the 
actual  figures  to  the  corresponding  "normal"  figures  are  95 
per  cent,  57  per  cent,  and   117  per  cent,  respecti\cly.     From 


14      Forecasting  Business   Conditions 

these  figures  we  conclude  that  the  pig-iron  industry  was  most 
active  at  the  last-named  date. 

Omitting  the  percentage  signs,  the  figures  just  given  are 
termed  indices.  They  are  indices  of  pig-iron  production  so 
constructed,  by  the  use  of  bases  increasing  with  time,  that 
the  normal  growth,  or  "secular  trend,"  is  eliminated. 

Eliminating  Seasonal  Variations 

But  there  is  another  type  of  fluctuation  which  must  be  re- 
moved before  the  figures  may  be  used  as  indices  of  business 
conditions.  We  must  remove  from  the  data  those  variations 
which  are  purely  seasonal  in  character,  which  recur  year  after 
year  as  a  consequence  of  the  round  of  the  seasons.  If  we  could 
assume  that  the  conditions  of  all  the  months  of  the  year  are 
alike,  that  there  is  no  characteristic  and  recurrent  variation 
which  regularly  differentiates  the  item  for  March  from  that  for 
February  or  December,  then  we  could  legitimately  compare 
the  indices  95,  57,  and  117.  But  the  iron  industry  is  seasonal 
in  character.  Just  as  a  normal  production  for  1904  is  not 
normal  for  1918,  so,  within  any  year,  a  "normal"  production  for 
March  is  not  normal  for  February  or  December.  If  we  repre- 
sent the  average  monthly  production  for  any  year  by  100,  the 
production  for  March,  February,  and  December  would  be 
represented  by  106,  94,  and  100,  respectively.*  Consequently, 
the  seasonal  indices  106,  94,  and  100  should  be  subtracted  from 
the  indices  of  95,  57,  and  117  found  above,  in  order  to  get  sig- 
nificant figures  for  comparison.  The  differences  are —  11  —  37 
and  17. 

These  differences  are  "percentage  deviations  of  original 
items  from  secular  trend  corrected  for  seasonal  variations." 
They  are  comparable  with  each  other;  and  they  measure  the 
relative  activity  (with  respect  to  existing  equipment)  of  the  iron 
industry  in  March,  1904,  February,  1908,  and  December,  1918. 
The  deviations  reveal  the  depression  in  March,  1904,  the  deep 

*See  Table  2  for  these  indices.  Table  14  and  Chart  K  present  the  indices  of  seasonal 
variation  for  interest  rates. 


C or r e ct ed  S tati s tic s  15 

depression  of  February,  1908,  and  the  great  activity  of  December, 
1918. 

These  deviations  become  still  more  significant  when  we 
compare  them  with  others  computed  in  the  same  manner  for  the 
period  1903-18.  The  months  of  deepest  depression  in  the 
period  were  December,  1903  (-44),  January,  1904  (-38),  January 
to  June,  1908  (ranging  from  -37  to  -44),  November  and  Decem- 
ber, 1914  (-40  and  -41).  The  months  of  greatest  activity  were 
March,  1905  to  October,  1907  (ranging  from  9  to  a  maximum  of 
26  in  July,  1907),  August,  1909  to  April,  1910  (ranging  from  12  to 
27),  and  September,  1915  to  December,  1918  (ranging,  with  five 
exceptions,  from  10  to  24).  Negative  deviations  of  -14  and  -13 
occurred  in  January  and  February,  1918,  as  exceptional  items  in 
a  series  of  forty  positive  deviations.  They  were  undoubtedly 
caused  by  the  severity  of  the  winter,  the  railroad  tieup,  and  the 
fuel  difficulties  of  the  months  in  question.  December,  1917  (2) 
and  March,  1918  (6)  were  also  low. 

Analysis  of  Sequence  of  Fluctuation 

The  individual  items  of  the  various  series  were  thus  corrected 
for  secular  trend  and  seasonal  variation  and  the  first  part  of  our 
statistical  problem  was  solved.  The  second  part  of  the  statistical 
problem  was  to  compare  the  various  series  with  each  other  in 
order  to  secure  sequence  of  fluctuations. 

In  order  to  make  a  legitimate  comparison  of  the  fluctuations 
of  the  various  series  with  each  other,  such  series  were  expressed 
in  terms  of  proper  units  selected  with  reference  to  the  problem 
in  hand.  Some  of  the  series  were  much  more  variable  than 
others,  that  is,  their  upward  and  downward  fluctuations  were 
more  frequent  and  more  extensive  than  others.  Railroad  gross 
earnings  fluctuated  between  ten  per  cent  below  and  ten  per  cent 
above  normal;  while  the  number  of  shares  traded  on  the  New 
York  Stock  Exchange  fluctuated  between  fifty  per  cent  below 
and  sixty-three  per  cent  above.  Evidently  a  common  measure 
of  variability  was  needed,  in  terms  of  which  each  of  the  series 
might  be  expressed  in  such  a  manner  as  to  make  their  fluctuation 
on  the  chart  strictly  comparable. 


16      Forecasting  Business   Conditions 

The  measure  adopted  was  the  "standard  deviation"  —  the 
most  widely  used  index  of  variabiHty.  This  is  an  average 
depending  upon  all  of  the  items  and  varying  directly  with  the 
dispersion  of  the  items;  the  wider  the  dispersion  of  the  items  the 
greater  is  the  standard  deviation.  By  using  the  standard  devia- 
tion as  the  unit  we  are  able  to  make  a  legitimate  comparison 
between  such  widely  different  series  as  pig-iron  production  and 
rates  on  commercial  paper. 

Graphic  Illustration  of  Method 

A  graphic  illustration  of  the  method  of  correcting  the  various 
series  and  getting  them  into  shape  for  comparison  is  given  by  the 
accompanying  charts  presenting  the  monthly  tonnage  of  pig 
iron  produced  in  the  United  States  and  the  monthly  rate  of 
interest  on  sixty-to-ninety-day  commercial  paper  in  New  York, 
for  the  period  1903  to  1920.  Charts  2  and  14  present,  first,  the 
actual  data  by  open  points;  second,  the  long-time  or  secular 
movements  of  the  series  by  the  dot-dash  lines;  and  third,  the 
cyclical  movements  by  the  heavy  curved  lines.  Charts  102  and 
114  present  the  two  series  just  named  corrected  for  secular  trend 
and  seasonal  variation.  The  units  used  are  the  respective 
standard  deviations.  The  method  and  results  of  comparing 
the  various  corrected  series  will  be  explained  in  the  following 
section. 


Corrected   Statistics 


17 


T^d/e  £  Afc^f/?/y  Jomage  of  P/gf  /ron  Prodi/ced  m  f//e  l/ff/fed  Stdfes 

fOdfd  for  Jd/iu^ry  /903  fo  JinM/y  /9/7  incfus/^e) 

FREQUENCY  TABLES,  ARRABGED  BY  MOUTHS,  OF  RELATIVES  FOUND  BY  EXPRESSIHG  THE  ITEM  FOR  EACH 
MONTH  AS  A  PERCEHTACE  OF  THE  ITEM   FOR  THE  PRECEDUIC  MOHTH 

RBUlIprES 

JU.             F.b.             mi.             Apt.             Mir             Jim             J«1T            "t             •«»«■       ,      ««■             »•"■        ,      B";^ 
D«7            Jul.             Pt».             Mil.       ;      ipr.             lur             Ji™             J«l7       1     4»C.       :     "W.            On.        |     »•». 

Below    70 

1                    .                    1                                       ,                    1                    .                    1                    '                    1                / 

70 



7' 

1                 1                1 

7J 

73 

/ 

74 

76 

77 

78 

/ 

79 

80 

81 

/ 

8} 

1 

83 

1 

l>4 

I 

/ 

8s 

/ 

1 

86 

1 

87 

88 

1                                       j 

1 

1 

89 

1                                       j 

1 

/ 

90 

/ 

91 

1 

< 

/ 

9> 

//* 

/i 

/ 

I 

/ 

93 

1                   1 

1 

/ 

/ 

94 

/! 

// 

II 

/ 

/ 

1 

95 

/         /I 

II 

II              1 

1 

96 

1 

1          i 

1 

/I 

97 

//                          A 

II             It 

/ 

/ 

98 

/■ 

' 

// 

III 

99 

////                            '           // 

i 

/ 

1 

// 

//             /                          /i 

II 

/ 

/ 

> 

101 

'/        /                /       y;                i 

1 

102 

/                / 

/i                1             A 

1' 

/ 

// 

1 

III 

103 

/        / 

1 

/I              / 

/// 

) 

104 

II 

1 

/I 

lOS 

1 

1 

1 

loS 

/ 

II 

// 

i 

/ 

1 

107 

A 

1 

1 

// 

u 

108 

i 

1 

1 

/ 

1 

109 

/ 

A 

1 

It 

1 

no 

i 

ll 

1 

III 

/ 

113 

1 

/ 

/ 

113 

/ 

"4 

IK 

IIS 

118 

/ 

117 

118 

119 

131 

111 

/! 

123 

124 

"5 

i)i 

"Z 

lit 

"0 

130 

131 

I3J 
133 

/ 

•  34 

130 

1.37 

138 

■39 

140 

Ortr     140 

■ 

MedUu 

inn      Qf,      na     QA    inp-i     .<J5    inn     /<o?     in/     im-i     ^a    laz  1 

ADJUSTED  MOHTHLY  IHDICES  OF  SEASONAL  VASUTION 

J" 

F*b.              HV.       ,       Apr                 Hjt              Jim              Jttr        i       Aaf               kvpl                Ort                ■•*.               D«<. 

^j99 

18      Forecasting  Business   Conditions 


Table  14    Mo/7f/r/y  ffafe  of //? feres f  on  J/jrfy-fo/V/nefy  D^y 
Commerda/  Paper  /n  fi/ew  VbrM 

{"P^f,!  for  January  /390  fo  J^nudry  /MZ  /hc/us/ye) 

FREQUENCY  TABLES,  ARRANGED  BY  MONTHS,  OF  RELATITFS   FODND  BY  EXPRESSING  THE  ITEM   FOE  EACB 
MONTH  AS  A  PERCENTAGE  OF  THE  ITEM   FOR  THE   PRECEDING   MONTH 

RELATIVES 

J.n._ 

-J.B.          1         P.b. 

API.       1      M.y 
Mai.       1      Apt. 

luoo      1      loly      ;     A«i. 
M.y      1     Jun      1      July 

sept. 
Au,. 

iept. 

J^^ 

>^7 

Below     70 

/ 

1 

70 

/ 

7" 

/ 

71 

1 

/ 

73 

1 

74 

75 

1 

75 

77 

, 

78 

/ 

79 

i 

/ 

/ 

Bi 

/ 

Bj" 

/// 

/ 

1 

/ 

83 

/ 

84 

A 

8S 

/ 

i 

/ 

/ 

1 

/ 

86 

II 

/ 

/ 

i 

'7 

II 

/ 

1 

89 

1 

li 

II 

89 

1 

/ 

i 

90 

1 

1 

/ 

/ 

/ 

91 

i 

l\                        1 

/ 

1 

/ 

/ 

92 

1 

1 

/« 

/ 

/ 

93 

/i 

II 

1 

\ 

/ 

94 

///,          nil 

II 

III 

/ 

/ 

95 

l\           II 

/I 

/ 

II                  1                1 

II 

96 

i\         n 

m 

l\                 \               1 

/ 

/// 

97 

i\          1 

1 

II         i\          1 

// 

II 

1 

98 

1:           II 

/ 

1 

ii\        ii\          \ 

/ 

■      7 

III 

99 

/ 

1 

mi\       III          i\        II 

II 

1 

III 

/ 

II 

Kll            II                \             1 

/ 

1 

II 

101 

in 

i\      )       1      h 

1          1 

102 

1 

II 

1 

III           fli\               1 

II 

II 

1          1 

">A_. 

1 

1 

II 

'1                / 

1 

It 

II         II 

1 

1 

1 

1 

1             *' 

1 

1 

II          1 

'»5 

II 

1 

1 

j             '" 

II 

II 
II 

/       yii 

106 

II 

II 

ft 

107 

1 

II 

1 

■ 

1 

108 

1 

/// 

1 

II 

1 

PI 

109 

II 

/ 

/ 

III! 

III 

It 

/ 

/ 

II 

II 

1 

III 

II 

// 

II 

1 

\ 

113 

1 

II 

II 

1        II 

>>3 

1 

II 

1 

114 

II 

1 

1 

"5 

1 

1 

iiS 

1 

/ 

1 

117 

1 

1 

1 

1 

/ 

119 

1 

1 

1 

120 

. 

1 

II 

131 

! 

1 

i 

132 

1 

j 

123 

1 

1 

124 

1 25 

136 

1 

127 

1 

/ 

129 

J30 

■31 

/ 

132 

1 

133 

134 

1 

135 

■36 

1 

1 

"Z 

! 

1 

136 

1 

1 

■39 

1 

/ 

140 

;          / 

1 

i 

Over     140 

1          / 

1 

// 

.__.       _.. 

'                                    '                  1 

MrdUns 

90       94^     los       99      98 

5a     /OS       109      lOfi      I02        9B     /Oi   1 

ADJUSTED  MONTHLY  INDICES  OF  SEASONAL  VARIATION 

J«n.              Feb.        (       Mtr.       [       Apt.        ,       Bfljy              Jane              July        -       Ant.             Sept.       '       Oct.        j       «o».              D«. 

iDdiccs 

9-9     fi^  \    <?'^  1    fi-4      OP     ^Q      fi'i     jo.^\   /in\   iip\  inA    in 

1          ■           1                                         1                     1 

Corrected   Statistics 


19 


CHAFIT  K 

COMPAfl/50A/  or  THE  Si^ASO/^/AL   VARMT/ON5  OF 

O — (^y~Tfie  average  y/'e/d  of  fen  rai/road  bonds 

#  O  Tfie  rate  on  four  tosi'x  monffjs  commert:/<3/  psper 
-%r-%—The  rafe  on  si)rfy  fo  n/nefy  days  commerci^/  paper 
0~0~7^<s  r<3fe  on  C3//  /o<}/7s  on  Me  A/etv  York  S/ocA  EAchange 

As  shoivn  by  the 
>J^i/j/S?</  Morj/h/y  /ndices  of  Seaoona/  Sfariaf/on  Aydrjye  fyrye^r-fbo 


Jin       fed         Afar       Apr        AUy      June     ^/y       Auy       Sep       Ocf       /Yon       Dec       Jtn 


20      Forecasting  Business   Conditions 

Chart  2  —  Actual  Figures  for  Monthly  Tonnage  of  Pig  Iron  Produced  in 
the  United  States,  1903-14. 

(a)  Production  in  units  of  1,000  gross  tons. 

(b)  Straight  line  fitted  to  date  for  1903-16. 

(c)  Twelve  months'  moving  average,  centered. 


Chart  102  — •  Corrected  Figures  for  Monthly  Tonnage  of  Pig  Iron   Pro- 
duced in  the  United  States,  1903-14. 


+1.0 


•2.0 


-3.0 


/ 

^  r 

oAi 

/ 

A 

(^ 

V 

/ 

V 

/ 

\ 

a/ 

1 

J 

Kr 

/ 

>/l. 

V 

\ 

J 

\ 

\ 

\ 

1903 

f904- 

1905 

!906 

\ 

/907 

1903 

1909 

J9I0 

191/ 

I9IS 

19/3 

1/ 

1914- 

Explanation  —  The  corrected  figures  of  Chart  102  were  obtained  from 
the  actual  figures  of  Chart  2  as  follows: 

First,  the  seasonal  element  was  eliminated  by  dividing  by  the  "indices  of 
seasonal  variation"  given  in  Table  2. 

Second,  the  growth  element  was  eliminated  by  taking  deviations  from  the 
straight  line  fitted  to  the  actual  data,  termed  the  "line  of  secular 
trend."  This  line  was  obtained  by  applying  the  mathematical 
"method  of  least  squares,"  which  gives  the  line  of  closest  "fit"  to  the 
actual  data. 

Third,  the  resulting  corrected  figures  were  divided  by  their  "standard 
deviation."  The  magnitudes  thus  secured  (termed  "cycles")  are 
comparable  with  the  magnitudes  similarly  obtained  from  other  series 
of  statistics. 


Corrected  Statistics 


21 


Chart  14  —  Actual  Figures  for  Monthly  Rate  of  Interest  on  Sixty-to- 
Ninety-Day  Commercial  Paper  in  New  York,  1903-14. 

(a)  Rates  in  units  of  one  per  cent. 

(b)  Straight  line  fitted  to  data  for  1903-16. 

(c)  Twelve  months'  moving  average,  centered. 


Chart  114  —  Corrected  Figures  for  Monthly  Rate  of  Interest  on  Sixty-to- 
Ninety-Day  Commercial  Paper  in  New  York,  1903-14. 


♦w 


A-H— VP 


-^-^ 


^■1;\- 


.^ 


...cL 


dd 


J, 


i^MT 


V 


/9C3 


/9C4 


1905 


I9D6 


/9C7 


'•A 

1906 


1909 


/9ia 


19/3 


/9I4- 


Explanation  —  The  corrected  figures  of  Chart  114  were  obtained  from 
the  actual  figures  of  Chart  14  as  follows: 

First,  the  seasonal  element  was  eliminated  by  dividing  by  the  "indices  of 
seasonal  variations"  given  in  Table  14  and  Chart  K. 

Second,  the  growth  element  was  eliminated  by  taking  deviations  from  the 
straight  line  fitted  to  the  actual  data,  termed  the  "line  of  secular 
trend."  This  line  was  obtained  by  applying  the  mathematical 
"method  of  least  squares,"  which  gives  the  line  of  closest  "fit"  to  the 
actual  data. 

Third,  the  resulting  corrected  figures  were  divided  by  their  "standard 
deviation."  The  magnitude  thus  secured  (termed  "cycles")  are 
comparable  with  the  magnitudes  similarly  obtained  from  other  series 
of  statistics. 


CHAPTER  IV 

THE   SEQUENCE   OF   FLUCTUATIONS 

Three  Distinct  Groups 

The  corrected  series,  which  we  have  termed  cycles,  are  ex- 
pressed in  proper  units  for  comparison.  Two  of  the  corrected 
series  are  presented  graphically  in  charts  102  and  114.  These 
curves  were  drawn  originally  on  translucent  paper  so  that  they 
could  be  compared  with  each  other  according  to  the  method 
indicated  by  Charts  A,  and  114  and  122. 

Each  one  of  twenty-two  corrected  series  was  compared  graphi- 
cally with  every  other  scries  by  placing  consecutively  one  sheet 
of  translucent  paper  with  its  curve  over  the  other  sheets.  The 
comparisons  were  made  over  an  illuminated  box  by  three  inde- 
pendent  observers   and    the   recorded    results   were   reconciled. 

Each  observer  recorded  (a)  the  degree  of  correlation  (high, 
moderate,  low)  for  the  best  fit  of  the  curves,  (b)  the  amount  of 
lag  in  months  for  maximum  correlation,  and  (c)  the  consistency 
of  lag  during  the  period  examined.  The  conclusions  of  the 
observers  were  further  verified  by  computing  "coefficients  of 
correlation." 

It  was  found  that  the  various  series  fell  into  three  distinct 
groups  when  arranged  in  order  of  sequence  of  fluctuations.  The 
series  which  fluctuate  first,  either  upward  or  downward,  are  all 
series  depending  upon  investment  and  speculation,  such  as  the 
average  price  of  ten  railroad  bonds,  the  average  price  of  industrial 
stocks,  the  average  price  of  railroad  stocks,  the  volume  of  sales 
on  the  New  York  Stock  Exchange,  and  New  York  clearings. 
This  is  the  speculative  group. 

The  scries  in  which  the  fluctuations  follow  or  lag  behind,  in 


24      Forecasting  Business   Conditions 

point  of  time,  the  fluctuations  of  the  speculative  group,  all  have 
to  do  with  business  and  industrial  activity  such  as  pig-iron 
production,  bank  clearings  outside  New  York  City,  Bradstreet's 
indices  of  commodity  prices,  and  the  index  of  commodity  prices 
of  the  Bureau  of  Labor  Statistics.  These  series  constitute  the 
business  group. 

The  series  which  fall  into  the  third  group  and  whose  fluctua- 
tions lag  behind  those  of  the  business  group  all  have  to  do  with 
banking  conditions  and  the  money  market.  These  series  are 
rates  on  commercial  paper  and  loans  and  deposits  and  reserves 
of  New  York  banks.  We  therefore  have  three  homogeneous 
groups  of  series  —  the  speculative  group,  the  business  group,  and 
the  banking  group. 

Composition  of  the  Index 

The  arrangement  of  the  series  according  to  the  order  in  which 
fluctuations  occurred  was  based  upon  a  comparison  of  the  entire 
curves  for  the  period  1903-14.  It  is  legitimate  to  average  the 
series  of  each  of  the  three  groups  because  the  fluctuations  of  the 
series  in  the  respective  groups  are  similar.* 

The  three  averages  for  1903-14  are  presented  graphically  on 
pages  30-31.  It  will  be  noticed  that  each  average  contains  two 
classes  of  series  —  one  class  representing  volume,  the  other 
price  of  (A)  securities,  (B)  commodities,  and  (C)  loans,  as 
follows : 

Group  A — Speculation  is  based  upon  (1)  the  volume  of 
speculation  represented  by  New  York  bank  clearings,  and 
shares  sold  on  the  New  York  Stock  Exchange,  and  (2)  prices  of 
bonds,  industrial  stocks,  and  railroad  stocks. 

Group  B  —  Business  is  based  upon  (l)  the  volume  of  com- 
modities produced  and  exchanged,  such  as  pig-iron  production, 

*In  averaging  the  series  of  the  third  group,  however,  the  algebraic  signs  of  the  items 
entering  the  series  for  loans  and  deposits  and  reserves  were  reversed  in  combining  the  last 
named  series  with  the  interest  rate  series.  As  rates  on  commercial  paper  go  up  the  volume  of 
loans  goes  down. 


The   Sequence   of  Fluctuations  25 

outside  clearings,  imports  of  merchandise,  and  gross  earnings  of 
railroads,  and  (2)  the  prices  of  commodities. 

Group  C — Banking  is  based  upon  (1)  the  volume  of  credit 
extended  as  indicated  by  loans,  deposits  and  reserves  of  New 
York  banks,  and  (2)  the  price  of  such  credit  as  indicated  by  the 
rates  on  commercial  paper. 

Index  Charts 

The  charts  presenting  the  averages  of  these  three  groups  of 
series  are  our  index  charts  of  general  business  conditions,  given 
for  the  period  1903-14  on  pages  30-31,  and  for  the  period 
November,  1918  to  January,  1922,  on  page  39. 

Charts  for  the  1903-14  period,  reproduced  on  a  larger  scale, 
together  with  a  tabular  statement  of  the  "lengths  and  features 
of  various  phases  of  business  cycles  during  1903-14"  are  given 
in  the  frontispiece. 


26      Forecasting  Btisi?t ess   Conditions 

Charts  102  and  114  —  Comparison  of  Corrected  Figures  or  Cycles  of 

(a)  Monthly  Tonnage  of  Pig-iron  Produced  in  the  United  States,  and 

(b)  Monthly  Rate  of  Interest  on  Sixty-to-Ninety-Day  Commercial 

Paper  in  New  York. 


Explanation  —  Chart  102  and  Chart  114  were  drawn  on  translucent 
tracing  paper  in  order  to  facilitate  comparison  of  the  two  curves.  Such  com- 
parison was  made  over  an  illuminated  box,  the  curves  being  shifted  to  the 
right  or  left  until  the  best  "fit"  was  secured.  The  following  conclusions  were 
recorded : 

(a)  The  "fit,"  or  correlation  of  the  curves  is  high  and  positive. 

(b)  The  best  fit  is  obtained  when  the  curve  for  interest  rates  is  shifted 

six  months  to  the  left.  The  cyclical  movements  of  pig-iron 
production,  therefore,  forecast  such  movements  in  interest 
rates  by  six  months  on  the  average. 

(c)  The  lag  of  six  months  is  fairly  systematic  for  the  entire  period 

1903-14,  although  the  best  fit  of  the  two  curves  for  the 
period  1903-06  is_  obtained  for  a  lag  of  one  year  in  interest 
rates,  for  the  period  1907-10  a  lag  of  six  months,  and  for  the 
period  1911-14  a  lag  of  three  months. 

The  conclusions  thus  obtained  were  verified  by  computing  three  "coef- 
ficients of  correlation"  for  the  items  of  pig-iron  production  paired  with  items 
of  interest  rates  four  months,  six  months,  and  eight  months  later  respectively. 
The  coefficients  resulting  were  -|-.72,-j-.75  and  +.70  for  the  respective  pairings, 
indicating  that  the  "fit"  for  a  six  months'  lag  of  interest  rates  is  better  than 
that  for  any  other  lag. 


The   Sequence   of  Fluctuations 


27 


Charts  114  and  122  —  Comparison  of  Corrected  Figures  or  Cycles  of 

(a)  Monthly  Rate  of  Interest  on  Sixty-to-Ninety-Day   Conimerical 

Paper  in  New  York,  and 

(b)  Monthly  Average  Loans  of  the  New  York  City  Clearing  House 

Banks. 


Explanation  —  The  cyclical  movements  of  interest  rates  and  bank 
loans  are  inverse.  When  interest  rates  move  upward,  bank  loans  decrease; 
when  interest  rates  move  downward,  bank  loans  increase.  This  relationship 
was  maintained  systematically  for  concurrent  items  of  the  two  series,  with  one 
marked  exception,  throughout  the  period  1903-14.  From  September,  1907, 
to  February,  1908,  the  two  curves  moved  together  instead  of  inversely.  The 
explanation  of  the  exception  to  the  rule  is  this:  during  the  panic  months  of  the 
autumn  of  1907  business  men  and  speculators  were  compelled  by  the  exigencies 
of  the  situation  to  borrow  in  spite  of  exorbitant  interest  rates;  during  the 
ensuing  months  of  depression  their  confidence  in  the  future  of  business  had 
evaporated  and  the  rapidly  falling  rates  were,  for  a  time,  not  sufficient  to 
induce  borrowing. 


SEQUENCE  OF  FLUCTUATION  OF  VARIOUS  SERIES 
SECULAR  TREND)  DURING  THE  PERIOD  INCLUD 

(Arranged  in  Order  of  Dates  of 


Series 


Date  of 

maximum 


Date  of  following 
minimum 


SPKCliLATION 
1.  Price  of  10  railroad  bonds    . 


2.  Price  of  industrial  stocks 

3.  Price  of  20  railroad  stocks   

4.  Bank  clearings  of  New  York  City    

5.  Shares  sold  on  New  York  Stock  Exchange 

Business 

6.  Unfilled  orders  of  the  United  States  Steel 

Corporation    

7.  Imports  of  merchandise 

8.  Number  of  business  failures  (Bradstreet's) 

9.  Value  of  building  permits  for  20   leading 

cities    

10.  Index  of  commodity  prices  (Bradstreet' s)  . . 

11.  Gross  earnings  of  10  leading  railroads   .... 

12.  Bank  clearings  outside  New  York  City  .  . . 

13.  Production  of  pig  iron    


14.  Index    of    commodity    prices    (Bureau    of 

Labor  Statistics)      

Banking 

15.  Loans  of  New  York  Banks    


16.  Deposits  of  New  York  Banks 

17.  Reserves  of  New  York  Banks 

18.  Rate  on  60-90-day  commercial  paper    .... 

19.  Rate  on  4-6  months'  commercial  paper  .  . . 


Aug.  1905 

Jan. 1906 

Jan.-Sept. 

1906 
Jan.  1906 

Jan.  1906- 
Mar.  1907 


Dec.  1906 
Dec.  1906 


Nov.  1907 

Nov.  1907 

Nov.  1907 

Dec.  1907 

June  1907- 
Apr.  1908 


June  1908 
Mar.  1908 


Jan.  1907*       Jan.  1908 


Apr.-May 

1907 
Mar.  1907 

May,  1907 

Jan.-May 

1907 
July,  1907 

Oct.  1907 


Mar.-Oct. 
1907* 

Mar.-Oct. 

1907* 
Nov.  1907* 

Dec.  1907 

Nov.-Dec. 
1907 1 


Mar.  1908 

June,  1908 

July,  1908 

Dec.  1907 

Jan. to 

May  1908 
June  1908 

Sept.  1908* 

Nov.  1908* 

Sept.  1908* 

Dec.  1908 

Sept.-Nov. 
1908 


*For  this  series  the  column  headings  should  be  minimum,  maximum   mini 
fFour-to-six  months'  paper,  not  salable  during  panic. 


{CORRECTED  FOR  SEASONAL  VARIATION  AND 
ING  THE  PANIC  OF  SEPTEMBER-OCTOBER,  1907 

Maxima  previous  to  the  Panic) 


Date  of  following 
maximum 


Remarks 


Apr.  1909      I  The  rise  from  Aug.,  1905,  to  Nov.,  1907,  and  the  fall  to  Apr., 

1909,  were  steady. 
Aug.  1909         Prices  were  high  during  1906,  and  then  f^ll  precipitately  until 

Dec,  1907. 
Aug.  1909  do.  do. 

June  1909-  Clearings  were  high  from  Jan.,  1906,  to  Mar.,  1907,  fell  precipi- 

Jan.  1910  tately  until  Dec,  1907,  and  then  rose  steadily. 

Aug.  1909-  The  volume  of  sales  was  high  from  Jan.,  1906,  to  Mar.,  1907. 
June,  1910 


Dec.  1909         The  decline  from  Dec,  1906,  to  June,  1908,  was  uninterrupted. 
Mar.  1910        Imports  were  high  from  Dec,  1906  to  Aug.,  1907.    A  precipitate 

fall  began  in  Sept.  and  a  steady  recovery  began  April,  1908. 
Jan.  1910*       The  decline  was  consistent  from  Dec,  1905,  to  Jan.,  1907.     A 

marked   increase  did   not  occur  until   the   panic    broke  in 

October. 
Apr.-July        The  volume  was  high  from  the  middle  of  1905  to  May,  1907. 

1909 
Jan.  1910         A  violent  rise  began  in  Aug.,  1906.     Prices  continued  high 

through  Oct.,  1907.     The  rise  after  June,  1908,  was  steady. 
Mar.  1910        The  rise  from  middle  of  1906  to  May,  1907,  was  steady  and  the 

ensuing  fall  was  precipitate. 
Mar.  1910        Clearings   were   very   high    in    1907   previous    to   November. 

The  recovery  following  Dec,  1907,  was  steady. 
Dec.  1909         Production  was  very  high  between  June,  1906,  and  Oct.,  1907, 

I       and  then  fell  precipitately  until  Jan.,  1908. 
Mar.  1910        The  index  was  very  high  in  1907  through  October.      The  fall 

was  precipitate.     The  rise  did  not  begin  until  Dec,  1908. 

July,  1910*  Contraction  of  loans  began  in  Nov.,  1905,  and  continued  to 
Mar.,  1906.  An  irregular  fluctuation  of  loans  took  place 
in  1907  with  expansion  in  May  and  November. 

July,  1910*  The  movements  of  deposits  is  almost  identical  with  that  of 
loans. 

May,  1910*  Reserves  reached  a  low  point  in  Feb.,  1907,  but  an  acute  drop 
occurred  in  Nov.  to  Dec,  1907. 

July,  1910  Rates  increased  steadily  after  Jan.,  1905,  and  violently  after 
I       July,  1907.     The  fall  during  1908  was  precipitate. 

July,  1910  do.  do. 


mum,  respectively. 


CHAPTER  V 
THE    INDEX,   1903-1914 

Time  Relationship  Between  Series 

It  will  be  seen  that  the  shaded  line,  which  represents  specula- 
tion, forecasted  very  accurately  all  the  major  movements  of  the 
solid  line  which  represents  business  activity  during  the  period 
covered  by  the  chart.  Thus  at  the  opening  of  1903  the  shaded 
line  showed  a  downward  movement  of  speculation,  which  had 
probably  set  in  before  the  opening  of  that  year;  while  the  solid 
line  had  not  yet  begun  to  move  in  a  downward  direction.  During 
March  to  April,  1903,  the  solid  line  began  to  follow  the  shaded 
line  downward,  and  it  continued  to  fall,  with  only  a  partial 
recovery  at  the  end  of  1903,  until  the  middle  of  1904  when  it 
reached  its  lowest  point  on  this  movement.  Meanwhile  specu- 
lative activity,  as  reflected  by  the  shaded  line,  had  begun  to 
recover  from  the  depth  of  the  depression  of  1903.  It  reached 
its  lowest  point  in  the  fall  of  1903,  and  then  began  to  move  very 


di-'ponffy/y  /li/'erages:  Cyc/es 

j        J^nt/^rr/  /903  -  July  ,'^'4 

-^      '" Ill'    Group  A 

I      ^'-i^  Group  ,6 

Grouo  C  j    j 

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I9C3  /9Q^  /905  >.906  /907  f908 

Group  A — Speculation       Group  B — Business       Group  C — Banking 


The   Index,    1903-14 


31 


slowly  upward.  In  July  to  August,  1904,  the  shaded  line  began 
to  move  upward  very  rapidly,  reflecting  the  speculative  activity 
which  culminated  in  the  year  1906.  Beginning  in  the  middle 
of  1904,  the  solid  line  moved  sharply  upward,  following  the 
shaded  line.  Late  in  1906,  the  shaded  line,  which  had  already 
receded  somewhat  from  the  high  position  reached  at  beginning 
of  the  year,  began  to  move  rapidly  downward.  Business  activity 
represented  by  the  solid  line,  continued  to  move  upward  until 
it  reached  the  high  level  which  it  maintained  during  the  first 
six  months  of  the  year  1907,  while  speculative  activity,  as  indi- 
cated by  the  shaded  line,  was  rapidly  falling  off,  presaging  the 
approach  of  the  panic  of  1907.  By  November  of  that  year  the 
panic  had  occurred  and  speculation  was  at  a  low-water  mark. 
Business  activity  and  commodity  prices,  as  indicated  by  the 
solid  line,  had  moved  very  rapidly  downward  from  the  high 
point  at  which  they  were  maintained  during  the  first  half  of  the 
year.  They  continued  to  fall  until  the  middle  of  1908;  but 
meanwhile  speculative  activity  had  begun  to  re\-i\-e  and  the 
shaded  line  representing  speculation  crossed  the  price  line 
again  early  in  1908.  This  was  exactly  what  had  happened  in  the 
middle  of  1904. 

After  1908  the  same  general  relationship  between  the  shaded 


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Group  A — Speculation       (ikoip  B- — Business 


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C'lRoip  C — Banking 


32      Forecasting  Business    Conditions 

and  solid  lines  continued  to  be  maintained,  even  through  such 
years  as  1910,  1911,  and  1912,  in  which  the  upward  and  down- 
ward movements  in  both  speculation  and  business  were  much  less 
marked  than  during  the  years  1904  and  1908. 

The  double  line,  which  represents  banking  conditions,  shows 
that  at  the  opening  of  1903  interest  rates  were  high,  bank  reserves 
had  been  depleted,  and  the  volume  of  bank  loans  had  necessarily 
been  reduced.  This  condition  of  financial  strain  was  maintained 
until  the  end  of  1903  when  the  "rich  man's  panic"  occurred,  then 
the  double  lines  started  to  follow  the  solid  line  downward. 
Banking  conditions  continued  to  get  easier  until  the  autumn  of 
1904,  when,  two  months  after  the  solid  line  had  started  to  move 
upward,  the  double  line  followed  suit.  It  will  be  seen  that  the 
banking  curve  was  the  last  to  decline  in  the  crises  of  1903  and 
1907  and  also  was  the  last  to  recover.  It  will  be  observed,  too, 
that  the  relationships  which  existed  from  1903  to  1908  continued 
during  the  rest  of  the  period  covered  by  the  chart. 

Forecasting  of  Movements 

Not  only  does  the  shaded  line  forecast  the  movement  of  the 
solid  line,  and  the  solid  line  forecast  the  movement  of  the  double 
line,  but  also  the  double  line  forecasts  the  movement  of  the 
shaded  one.  For  instance,  at  the  opening  of  1904,  the  double 
line,  which  represents  interest  rates,  was  rapidly  falling  and  the 
shaded  line  which  represents  security  prices  was  very  slowly 
recovering  from  the  depcession  of  1903.  In  July  to  August,  1904, 
the  shaded  line  started  sharply  upward  and  crossed  the  double 
line.  Clearly  enough,  a  sharp  decline  in  interest  rates  preceded 
by  several  months  the  sharp  rise  in  security  prices  which  took 
place  in  the  last  six  months  of  1904  and  continued  throughout 
the  following  year.  The  close  relationship  between  the  double 
and  the  shaded  lines  is  also  apparent  in  their  movements  during 
1906.  From  the  low  point  reached  in  September  to  October, 
1904,  the  double  line  had  rapidl}^  risen  until  it  reflected  high 
interest  rates  and  a  strained  financial  condition  in  the  opening 
months  of  the  year    1906.     This  sharp   rise   is   followed   by   a 


The   Index,    1903-14  ?>Z 

moderate  downward  movement  of  the  shaded  line  during  the 
year  1906.  During  this  year  banking  conditions  became  in- 
creasingly difficult,  as  indicated  by  the  double  line.  By  the 
latter  part  of  that  year  the  shaded  line  began  to  move  sharply 
downward.  In  November,  1907,  at  the  time  of  the  panic,  the 
double  line  is  nearly  at  the  highest  point  and  the  shaded  line  at 
the  lowest  point  reached  during  the  twelve  years.  Immediately 
thereafter  the  double  line  moves  abruptly  downward  and  the 
shaded  line  rises  to  meet  it,  crossing  it  just  before  the  middle  of 
1908.  Similar  relations  seem  to  have  been  maintained  between 
the  double  and  shaded  lines  to  the  end  of  the  period  covered  by 
the  chart. 

Period  of  Transition  1914-18 

The  chart  for  the  period  1914-18  has  not  been  reproduced 
because  this  was  a  period  of  transition  in  which  the  normal 
relation  previously  existing  between  the  various  series  was  so 
greatly  disturbed  that  the  fluctuations  have  little  or  no  bearing 
upon  the  present  situation. 


CHAPTER  VI 
THE   RATIONALE   OF  THE   FLUCTUATIONS 

Phases  of  the  Business  Cycle 

The  established  sequence  of  the  fluctuations  of  the  three 
curves  and  the  constitution  of  the  grouping  upon  which  they  are 
based  enables  us  to  explain  the  business  cycle  in  economic  terms. 
Examination  of  the  index  chart  for  1903-14  shows  clearly 
five  recurrent  phases  in  the  business  cycle,  each  phase  occurring 
three  times  during  the  period  from  1903-13.  The  five  phases 
are: 

Depression 

Revival 

Business  prosperity 

Financial  strain 

Industrial  crisis 

Each  phase  of  the  business  cycle  is  distinguished  by  characteristic 
movements  of  speculation,  of  business,  and  of  banking.  The 
peculiar  features  of  each  phase  together  with  the  length  of  time 
each  continued  are  set  forth  in  the  table  of  the  frontispiece. 

The  Sequence  of  Fluctuations  Described 

The  sequence  of  fluctuations  and  the  inter-relation  between 
speculation,  business,  and  banking  during  the  various  phases  of 
the  business  cycle  are  as  follows: 

Starting  with  depression,  phase  1,  we  have  as  a  legacy  from 
the  preceding  period  of  liquidation:  (a)  low  prices  of  securities 
and  volume  of  speculation,  (b)  declining  commodity  prices  and 
business  activity,  (c)  declining  rates  on  commercial  paper  and 
increasing  bank  reserves.  This  situation,  which  existed  during 
the  first  half  of  1904,  for  instance,  paves  the  way  for  revival. 
The  low  volume  of  speculation  and  decreasing  business  activity 


Rationale   ofFluctitations  35 

have  their  correlative  in  rapidly  falling  rates  for  commercial 
loans.  Rates  presently  decrease  to  a  point  which  makes  it 
profitable  to  purchase  securities.  In  other  words,  securities 
selling  at  a  very  low  price  bring  higher  returns,  even  with  de- 
pressed business,  than  the  rate  at  which  short-time  money  can 
be  obtained.  Idle  funds,  therefore,  are  drawn  into  the  specula- 
tive market  to  purchase  bonds  and  high  grade  stocks.  As  the 
speculative  advance  goes  on  the  lower  grade  securities  are  pur- 
chased. With  the  upward  movement  of  speculation  we  enter 
into  the  second  phase  of  the  business  cycle.  Increasing  specu- 
lation is  followed  by  increasing  business  activity.  Funds  are 
available  at  low  rates  to  finance  business,  and  consequently, 
an  increase  in  business  activity  follows  the  advance  in  specula- 
tive activity.  In  phase  2,  therefore,  we  have  increasing  specu- 
lation, increasing  business,  and  increasing  rates  for  short-time 
money  following  each  other  in  the  order  named. 

Presently,  however,  the  demand  of  speculation  and  business 
for  funds  cannot  both  be  granted  to  the  degree  demanded  and  we 
enter  phase  3.  Business  is  competing  against  speculation  and 
speculation  must  give  way.  Manufacturers  and  dealers  are  the 
year-in-and-year-out  customers  of  the  banks  and  if  the  shortness 
of  funds  makes  discrimination  necessary,  the  discrimination  will 
be  in  favor  of  business  men  and  against  speculatois.  Funds  are 
therefore  withdrawn  by  banks  from  the  speculative  market  to 
finance  business  men  whose  needs  grow  as  commodity  prices 
increase. 

The  situation  just  described  leads  to  phase  4  of  the  business 
cycle,  the  chief  characteristic  of  which  is  money  strain.  The 
drain  of  funds  from  security  markets  into  business,  causes  as  its 
immediate  effect,  high  rates  for  collateral  loans  whether  on  call 
or  time.  The  bull  market  in  securities  characteristic  of  phase 
2,  and  the  hesitation  characterizing  phase  3,  is  replaced  by  a 
bear  market  characterizing  phase  4.  Business  activity  continues 
during  phase  4,  and  absorbs  the  available  funds  so  that  low  bank 
reserves  result.  During  this  period  and  the  preceding,  there  are 
many  new  business  undertakings,  some  of  which  arc  sure  to 
prove  ill-advised.     Credit  has  been  extended  by  some  banks  on 


36      Forecasting  Bu si 71  ess   Conditions 

securities  of  doubtful  value  or  on  commodities  at  inflated  prices. 
In  other  words,  there  are  weak  places  in  the  business  and  banking 
structure  which  may  give  way  upon  the  occurrence  of  some  un- 
toward event.  With  the  occurrence  of  some  such  event,  which 
causes  loss  of  confidence,  we  pass  into  phase  5,  characterized  by 
more  or  less  drastic  liquidation  in  both  security  and  commodity 
markets. 

If  such  liquidation  takes  place  gradually  we  have  a  type  of 
industrial  crisis  which  is  not  spectacular.  The  liquidation  may 
cover  so  short  a  time  and  be  so  drastic,  however,  that  the  crisis 
will  be  accompanied  by  a  panic.  In  the  case  of  gradual  liquida- 
tion it  is  difficult  to  locate  the  exact  time  of  the  turning  point. 
In  the  case  of  drastic  liquidation  it  is  possible  to  locate  the  turning 
point  within  narrow  limits.  Following  the  crisis,  whether  it  be 
gradual  or  abrupt,  there  are  cancellation  of  orders,  closing  of 
factories,  unemployment,  rapidly  decreasing  rates  for  loans,  and 
increasing  bank  reserves.  This  is  the  period  of  business  depres- 
sion with  its  declining  money  rates  and  low  security  prices  with 
which  we  started. 

Pivotal  Factors 

This  account  of  the  business  cycle,  based  upon  our  statistical 
analysis,  revolves  about  the  fluctuation  of  short-time  interest 
rates,  speculation,  and  business. 

We  may  think  of  interest  rates  as  varying  inversely  with  the 
amount  of  the  bank  reserves  in  the  credit  reservoir.  The  flow 
in  the  supply  pipe  to  this  reservoir  depends  upon  the  volume  of 
gold  imports,  gold  production,  and  the  volume  of  paper  currency. 
There  are  three  outlets  from  this  reservoir  of  credit.  One  pipe 
furnishes  credit  for  speculation  in  securities;  a  second  pipe  is 
for  the  flow  of  credit  into  business;  the  third  is  for  gold  exports 
and  currencj'^  for  domestic  uses. 

When  the  level  of  credit  in  the  reservoir  is  high,  and  perhaps 
the  outlet  to  business  is  partially  clogged,  the  flow  of  funds  into 
speculation  begins.  After  this  flow  goes  on  for  some  time, 
Jiowever,  and  the  flow  into  business  increases,  the  level  of  credit 


Rationale   of   Fluctuations 


37 


in  the  reservoir  falls.  Obstruction  is  offered  to  the  flow  into 
speculative  markets  by  the  devices  of  higher  interest  rates  and 
direct  discrimination  against  speculation  and  in  favor  of  business. 
The  outlet  into  speculation  therefore  becomes  clogged  but  the 
flow  into  business  goes  on.  The  level  in  the  reservoir  becomes 
still  lower  until  the  time  is  reached  when  bankers  consider  it 
dangerous  to  allow  the  outflow  to  continue.  We  then  have  a 
halt  in  further  credit  expansion,  or  to  use  our  illustration,  the 
credit  outlets  are  clogged  for  a  time  and  bank  reserves  are  brought 
back  to  normal  by  allowing  the  supply  to  again  fill  the  tank. 


447475 


CHAPTER  VII 
THE   INDEX,  1918   TO   JANUARY    1,  1923 

Recent  Special  Difficulties 

For  the  period  1914-18  the  index  of  general  business  condi- 
tions appears  to  be  valueless  as  a  guide  to  present  business 
developments.  This  was  expected  when  it  was  constructed. 
The  Great  War  and  government  control  of  industry  dislocated 
economic  conditions  to  such  an  extent  that  the  normal  relations 
which  the  index  shows  to  have  obtained  in  time  of  peace,  could 
not  fail  to  be  disturbed,  so  that  our  chart  (not  here  reproduced) 
shows  for  the  period  extending  from  1915-18  nothing  but  the 
abnormal  conditions  resulting  from  the  war.  The  fluctuations 
of  the  statistical  series  during  the  war  were  violent  and  appar- 
ently erratic.  It  is  not  likely  that  even  the  most  careful  study 
of  the  movements  that  prevailed  during  the  war  period  will 
throw  any  light  on  the  course  of  current  fluctuations. 

When  the  task  of  constructing  an  index  of  business  conditions 
for  the  3'ear  1919  was  undertaken,  three  difficulties  were  faced: 
(1)  many  of  the  sources  of  business  statistics,  such  as  imports, 
value  of  building  permits,  number  of  business  failures,  and 
railroad  gross  earnings  were  in  the  early  months  of  1919  still 
subject  to  influences  of  various  kinds  which  made  them  tem- 
porarily of  little  use  for  our  purpose;  (2)  some  of  the  series  of 
statistics,  such  as  commodity  prices  and  interest  rates,  show 
that  there  has  been  an  abrupt  break  in  the  continuity  of  the 
phenomena  which  they  measure  and  reflect;  (3)  still  other 
series  such  as  reserves  of  New  York  banks,  and  perhaps  loans 
and  deposits  of  such  banks,  have  permanently  lost  their  sig- 
nificance as  indices  of  business  conditions  because  of  a  change 
in  economic  organization  or  for  other  reasons. 


The    Index,    1918-23 


39 


Index  Chart,  1920-1923 


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1921 


Make-up  of  Current  Index  Chart 

In  consequence  of  these  difticulties  it  was  necessary,  first,  to 
discard  some  of  the  series  previously  used,  and  second,  to  make 
adjustments  in  the  .series  retained  to  allow  for  the  change  of 
level  that  occurred  during  the  period  of  transition  1914-18. 
The  current  inde.x  chart  is  based  upon  the  following  groups  of 
series: 

A.     SPECULATION: 

New  York  clearings 

Shares  traded  on  the  New  York  .Stock  ICxchange 

Price  of  industrial  stocks 


B.     BUSINESS 


Bank  clearings  outside  New  \'ork  City 
Bradslreet's  indices  of  commodity  prices 


40         Forecasting  Business   Conditions 

C.     BANKING 

Rate  on  four-to-six  months'  paper 
Rate  on  sixty-to-ninety-day  paper 

Certain  adjustments  had  to  be  made  in  these  series.  For 
instance,  our  economic  analysis  led  us  to  the  conclusion  that  the 
level  of  commodity  prices  had  definitely  changed  and  that  in 
order  to  get  the  significance  of  fluctuations  at  the  present  time, 
such  fluctuations  should  be  measured  from  a  new  level.  Con- 
sequently such  an  estimate  was  made.* 

Interpretation  of  Current  Index  Chart 

The  current  index  chart,  then,  contains  three  curves  repre- 
senting fluctuations  of  speculation,  business,  and  banking, 
constructed  from  the  available  series  such  as  to  make  the  curves 
as  similar  as  possible  to  those  of  the  period  1903-14.  The 
fluctuations  of  these  curves,  therefore,  are  to  be  interpreted 
according  to  the  rules  drawn  from  the  analysis  of  the  period  1903- 
14,  making  due  allowance,  of  course,  for  such  changes  in  the 
economic  structure  or  underlying  conditions  as  appear  to  have 
taken  place. 

The  meaning  to  be  derived  from  the  current  index,  we 
conclude,  is  to  be  obtained,  first,  by  statistical  analysis,  that  is 
by  observing  the  correspondence  of  current  fluctuations  to  those 
of  the  period  1903-14,  and  second,  by  economic  analysis,  that 
is,  by  comparing  the  fundamental  conditions  underlying  the 
present  situation  with  those  underlying  apparently  similar 
situations  in  the  period  1903-14. 

Forecast  in  February,  1920 

The  forecast  in  February,  1920,  was  as  follows: 
"The  continued  decline  of  speculation  in  securities,  of  security 
prices,  and  of  central  bank  reserves,  together  with  the  increase 
of  rates  on  commercial  paper,  indicate  that  we  are  now  in  that 

*The  adjustment  of  the  various  series  made  necessary  by  the  period  of  transition  1914 
to  1918  are  explained  in  detail  in  the  supplements  to  The  Review  of  Economic  Statistics  for  June 
and  July,  1919. 


The    Index,    1918-23  41 

phase  of  the  business  cycle  characterized  by  financial  strain, 
liquidation  of  securities,  and  a  check  to  the  upward  movement 
of  commodity  prices  and  business  activity. 

"Our  Index  of  General  Business  Conditions  and  supple- 
mentary economic  analysis  lead  us  to  the  conclusion  that  the 
liquidation  which  began  in  security  markets  last  November  will 
be  followed  by  a  recession  of  commodity  prices  and  a  decrease  of 
business  activity.  Continued  depression  in  security  markets 
accompanied  by  liquidation  in  commodity  markets,  which  will 
continue  until  the  financial  strain  is  relieved,  is  our  forecast  of 
the  probable  developments  of  the  next  four  or  six  months. 

"It  does  not  now  appear  probable  that  the  liquidation  in 
commodity  markets  will  lead  to  panic.  Price  recessions  in  iron, 
steel,  and  other  commodities,  would  undoubtedly  uncover  a 
considerable  domestic  demand  from  public  utilities.  Other 
industries,  such  as  those  handling  building  materials  and  petro- 
leum, also  appear  to  be  in  a  relatively  strong  position  and  such 
price  recessions  in  their  products  as  occur  may  be  small.  A 
marked  decrease  in  our  excess  of  exports  is  one  of  the  probabil- 
ities, however,  and  certain  industries,  such  as  those  dealing  in 
luxuries,  those  selling  to  the  European  market,  and  those  com- 
peting in  the  home  market  against  foreign  producers,  may  be 
severely  affected. 

"Two  disturbing  developments  which  have  been  in  progress 
since  the  opening  of  the  year  may  lead  to  serious  difiicultics. 
One  is  the  sensational  rise  of  commodity  prices  amounting  to  4 
per  cent  in  the  single  month  of  January.  The  other  is  the  per- 
sistent decline  of  reserves  of  the  combined  federal  reserve  lianks 
in  a  season  when  reserves  normally  increase,  a  decline  which  is 
due  in  some  measure  to  continued  gold  export  from  t!ie  I  nited 
States.  These  developments  make  a  readjustment  in  business 
appear  more  probable  than  it  seemed  a  month  ago;  and,  if  iIk'\- 
continue,  will  decrease  greatly  the  severiU"  of  such  adjustmenl." 

Deductions  from  the  Chart  in  1921  and  Again  in  Early  192.? 

The  approximate  jxjint  of  stabilization  in  i)rices  w.is  reached 
in  May,  1921. 


42        Forecasting  Business   C  on  ditio?t  s 

The  upward  movement  of  Curve  A  "Speculation"  and  the 
decline  of  Curve  C  "Money  Rates,"  as  shown  in  the  Chart  at 
the  bcginninti'  of  this  chapter,  which  began  in  the  middle  of  the 
summer  of  1921 ,  forecast  thatsubstantial  improvement  in  business 
conditions  which  was  well  under  way,  it  will  be  noted,  in  early 
1922.  This  improvement  in  business  conditions  continued 
without  interruption  into  1923. 

In  January,  1923,  the  Chart  continued  to  forecast  firm  to 
rising  wholesale  prices,  and  expanding  business  activity  through- 
out the  year. 

Curve  C  showed  banking  conditions  still  fundamentally 
sound,  re-discounting  was  on  a  reasonable  scale  and  there  was 
every  reason  to  believe  that  banks  could  readily  command  funds 
sufficient  to  finance  business  expansion  for  the  remainder  of  the 
year.  Interest  rates  depending  so  much  on  the  policy  of  re- 
discounting  could  onl}^  be  forecast  as  firm,  or  tending  toward  a 
higher  level. 

Early  1923,  found  considerable  hesitation  on  the  part  of 
business  men  to  make  commitments  at  higher  level  of  prices, 
due  to  fear  of  a  "Buyers  Strike"  and  a  remembrance  of  the 
lessons  of  1919  and  1920.  Such  a  development  could  only  be 
construed  as  favorable  at  that  phase  of  the  business  cycle. 

The  Chart  indicated  that  so  long  as  a  conservative  attitude 
dominated  the  general  community,  the  prospect  of  continued 
healthy  advance  remained. 


TEST  QUESTIONS 

"MEASURING   AND    F-QRECASTING   GENERAL 
BUSINESS   CONDITIONS" 

The  Test  Questions  can  be  answered  directly  from  the  Text 
discussion.     You  will  find  them  helpful  for  purposes  of  re\iew. 

1.  Why  has  the  question,  when  to  buy  or  sell,  such  impor- 
tance? 

2.  What  value  and  limitations,  ha\"e  current  predictions 
made  upon  the  basis  of  what  occurred  after  the  Civil  War  or  the 
Napoleonic  Wars? 

3.  W^hat  is  meant  by  seasonal  variation?  by  secular  trend? 
Why  should  these  be  eliminated  in  attempts  to  estimate,  or 
measure,  the  influence  of  the  cycle? 

4.  Which  group  of  items  tend  to  fluctuate  first?  Why  should 
items  of  similar  time  movements  be  kept  distinct  from  those  of 
earlier  or  later,  time  movements? 

5.  Can  dependence  be  placed  upon  a  so-called  "law  of 
Action  and  Reaction?"  Show  how  the  mere  averaging  of 
various  groups  of  statistics  tends  to  produce  a  blurred  picture. 

6.  When  speculators  and  business  men  compete  for  loanable 
funds,  which  do  the  banks  favor  as  a  rule? 

7.  What  three  groups  compose  the  Index  described  in  the 
Text?     What  items  in  each  gioup? 

8.  What  are  the  chief  characteristics  of  each  phase  of  the 
business  cycle? 


Garden  City  Press,  Inc^ 
Newton,  Mass. 


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